In one of the videos in Youtube which explained about stock buy backs, it was told that companies can achieve higher Return on Assets by doing stock buy backs. The explanation went like this :- When a company does a share buy back, its assets decrease whereas earnings remain constant. Since RoA is (Earnings / Assets) * 100%, RoA gets boosted.

What I do not understand is the fact that how the assets decrease? Company is using the cash to be converted into its own stocks, which is also an asset. If the share price goes up then assets increase else it goes down. Then how can we claim that assets definitely decrease when a share buy back is done?


The definition of RoA is:

RoA = Net Income / Avg Total Assets, where Net income = Total Revenue - Total Expenses

Also note the basic accounting formula:

Assets = Equity + Liabilities

Assets can be current (e.g cash in the bank, inventory, accounts receivable, etc) or long term (e.g. machinery, property,etc) and are defined as 'economic resources' i.e. they can create/generate value.

A company is buying back shares either with cash it holds or 'borrows' the cash to do it. In the former case, its cash (an asset) is decreasing.

In both cases the (outstanding) equity is decreasing. The shares that the company bought back are now 'treasury shares' BUT are not an asset (cant create value in their form). Many times these treasury shares are retired or held and sold on later. They are not classed as asset, and their market value is not used as part of a company valuation.

I suggest searching for a description of the accounting formula first followed by further searches on shares outstanding/treasury and then share repurchases, CFA institute material (public or otherwise) is always good to read.

Hope the above helps, sorry if I didnt expand my answer enough as its a very wide and deep topic I am still trying to learn about


RoA = Net Income / Avg Total Assets

In a stock buy back, cash (an asset) is used purchase equity.

The purchased stock does not become an asset but rather forms a Debit account on Shareholders Equity and a Credit to Cash

Thus Assets decrease while income stays the same.


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